September 25, 2020

The Fed’s Crisis Lending: A Billion Here, a Thousand There

WASHINGTON — The Federal Reserve lent billions of dollars to the nation’s largest banks during the financial crisis in the fall of 2008. It also lent $400,000 to the Eudora Bank, a community lender with a single location in the center of Eudora, Ark.

Day after day in late October and early November, near the high-water mark of the Fed’s efforts to rescue Wall Street, the central bank also made dozens of similarly modest loans to small banks in communities across the country.

Some banks, like Howard Bank, a suburban lender with four offices outside Baltimore, borrowed as little as $1,000 — a fire drill in case things got worse.

Other borrowers already were facing dire problems. Several have since failed, including La Jolla Bank in Southern California, which took $6 million.

The Fed released a complete list Thursday of banks that borrowed during the crisis from its discount window, its oldest and broadest emergency lending program. The central bank already released similar information for its other lending programs.

As with those other programs, the discount window mostly served the giant banks like Bank of America, Citigroup and Washington Mutual, whose struggles to survive the consequences of reckless lending and investment have defined the narrative of the crisis.

But the discount window was unique because it was open to smaller banks, too. The other emergency programs were created during the crisis to support the trading and investment activities that are concentrated in New York. The discount window, which predates the crisis by almost a century, was created to help commercial banks weather cash squeezes.

The long list of banks that lined up at the window, which the Fed provided in the form of a daily loan register, shows a crisis stretching far beyond Wall Street.

On Wednesday, Oct. 29, 2008, for example, the Fed lent money to 60 different banks, in amounts ranging from $1,000 to $26.5 billion.

At least 10 of those banks have since failed.

Borrowing from the discount window is considered a sign of weakness, and banks historically have avoided it if they can. From 2003 through 2006, the Fed lent an average of less than $50 million each week.

By the summer of 2007, however, the central bank was increasingly concerned that a growing number of banks needed help but were unwilling to borrow. In August, the Fed slashed the cost of borrowing from the discount window by half a percentage point. Then it arranged for four of the nation’s largest banks, Bank of America, Citigroup, JPMorgan Chase and Wachovia, to take what were described as symbolic loans of $500 million.

By the peak of the crisis in late October and early November 2008, the volume of outstanding discount window loans reached above $100 billion.

The Fed has long treated its interactions with banks as confidential but a series of federal courts ruled that it had to provide information on its emergency lending programs in response to Freedom of Information Act requests filed more than two years ago by Bloomberg News and the Fox Business Network.

The Fed provided the data to reporters Thursday in the form of several hundred electronic images of the original documents, loaded on a compact disc, distributed by hand at 10 a.m. in the cramped security checkpoint outside its headquarters building.

By contrast, the Fed released data on its other emergency lending programs in December by creating a public, searchable Web site.

Bankers have expressed concerns about the release of the data, saying that the prospect of publicity will deter future borrowing.

“I think it will make it harder for people to use the discount window in the future,” Jamie Dimon, chief executive of JPMorgan Chase, said Wednesday.

Article source: http://feeds.nytimes.com/click.phdo?i=cd6ca9c035e6a4ad328861fbeca0bc2c

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